OMAHA, Neb. - Peter Kiewit Sons' Inc., a huge construction and niche telecommunications company, is using mutual funds as a tool of in-house corporate cash management.
It set up the funds to find a way to pool Kiewit's own complex corporate cash portfolios of upward of $1 billion. With its myriad subsidiaries, partly owned joint ventures and projects - some 70 entities - Kiewit legally had to keep the corporate cash in separate portfolios until it conceived of setting up its own mutual funds.
Kiewit - heretofore a non-financial company renowned for its construction work and entrepreneurial initiative - plans to market its mutual funds to other corporations and institutional organizations for corporate cash management, as well as to pension funds.
Ann C. McCulloch, vice president and treasurer of Kiewit and president of Kiewit Investment Management Corp., is developing a strategic business plan. She is working with Treasury Strategies Inc., Chicago, to market the funds to other corporations. Treasury Strategies helped her develop the mutual fund idea for Kiewit.
Anthony J. Carfang, partner at Treasury Strategies, said he knows of no other company creating mutual funds for internal corporate cash management.
Aside from selling the funds as normal investment vehicles, Kiewit will offer private-label funds.
A key to the strategy is to keep Kiewit's costs down by expanding the assets under management.
Hospitals, health care organizations and insurance companies will be a focus of Kiewit's marketing, said Mr. Carfang. Like Kiewit, these organizations usually are unable to pool investments for their various units or operations in different states, and thus, must have costly, usually underperforming separate investment portfolios.
As part of its new marketing effort, Kiewit Investment Management - set up in 1994 to manage Kiewit's mutual funds - hired its first sales director, John Jackson, as manager-institutional marketing.
Mr. Jackson, who was a portfolio manager at Old Dominion Asset Management, New York, said the company also is targeting endowments and foundations.
Kiewit set up five seemingly conventional mutual funds: a value-oriented equity fund, a money market fund, a short-term government securities fund, an intermediate bond fund and a tax-exempt fixed income fund. But the impe-tus has been strictly cash management, Ms. McCulloch said.
"It's a very clever and innovative way to manage cash for a company like Kiewit," noted John J. "Jack" Quindlan, former chief financial officer of DuPont and a trustee of the Kiewit mutual funds.
Indeed, when Ms. McCulloch joined Kiewit, "the high priority was to restructure its cash investments," she said. With its approach, "there was no ability to optimize the portfolios."
Under its former approach, it had to maintain costly record keeping to track cash investments for each of its business entities.
"We had roughly 65 different accounts," she said. Some had more than $100 million. But other accounts amounted to a few million dollars, she added. "Some of the accounts had significant variability of cash flows in and out."
Because of that variability, she said, "we had to invest a lot of the cash in overnight paper. We weren't able to forecast (cash flow) for longer-term investments."
The cash manager, meanwhile, "had to deal with large swings in cash flow. There was no ability to optimize the portfolio. So the portfolio tended to be very short, 30 days, on over $1 billion."
Complicating the process, Kiewit had to make separate investments for each account. And because many of the Kiewit ventures are only partly owned by the company, it cannot dictate how to invest the cash without seeking consensus from its partners.
Before creating Kiewit Investment Management, she said she looked at outsourcing investment management, including using outside mutual funds.
"But with $1 billion in cash to invest, we thought we could set up a mutual fund company that would be competitive."
Kiewit management "felt more comfortable with having control" over investments, she added. "This was also a time when there were worries about some money market funds 'breaking the buck barrier,'*" that is, having their net asset value fall below $1 a share, she said, skewing Kiewit management against having the cash management run by outside mutual funds.
In setting up the mutual funds registered with the Securities and Exchange Commission, Kiewit added to the costs of its cash management process because of the need to comply with regulations and reporting requirements.
But Ms. McCulloch said the company has "more than offset the cost of establishing the mutual funds with improvements in performance." The cost amounted to about five basis points over a non-regulated conventional cash management portfolio.
Since starting the mutual funds, Ms. McCulloch said all Kiewit's joint ventures and projects have put their corporate cash in them. "We had to lobby the partners," she added, to explain the advantages of the mutual funds.
Kiewit Investment Management helps the parent's entities with asset allocation strategy.
"We don't like construction joint ventures to put money in the equity fund, if they need the money within a year," Ms. McCulloch suggested.
Kiewit isn't alone among non-financial companies starting their own mutual funds - others include General Electric Co. and Owens-Illinois Inc. But it appears to be unique in creating them for cash management.
Bechtel Group Inc., San Francisco, another construction company, created its own money management unit and mutual funds, called Fremont Investment Advisors Inc. But its funds aren't used for cash management, said David L. Redo, Fremont president.
Paul Unruh, Bechtel's chief financial officer, said the construction company formed Bechtel Capital Management Corp. to concentrate its cash management. But Bechtel Capital is only used for Bechtel's corporate cash. "It's not available outside the company," he added. Mr. Unruh declined to disclose how much Bechtel Capital invests. The investments are managed by the Bechtel treasury staff.
Being a non-financial company was no disadvantage to Kiewit in setting up competitive mutual funds.
"They've shown tremendous innovation in a variety of businesses," said L.B. "Red" Thomas, who was for 20 years senior vice president, treasurer and principal finance officer of ConAgra Inc., also based in Omaha, and is now ConAgra's corporate secretary and risk officer and a trustee of the Kiewit funds.